Minister Yuval Steinitz has decided to reduce value-added tax (VAT) by half a percentage point at the beginning of 2010. The new rate will be 16%, and it will go into effect on Friday, January 1.

The lower tax is expected to increase economic growth, to increase purchasing power of weaker segments of society and to narrow socio-economic gaps, and – along with increases in the interest rate – to curb inflationary pressures.

The Finance Ministry said state revenues would decrease by NIS 1.8 billion as a result of the move. It stated that this was made possible by the fact that Israel was not very severely impacted by the recent international economic crisis, and has been witnessing economic growth since the passage of the bi-annual budget and economic plan.

MK Shai Hermesh, the Kadima party's representative on the Finance Committee, praised Steinitz (Likud), saying "this regressive Israeli tax is among the highest in the world, and I congratulate the Finance Minister on his decision. However, this move is only one side of the coin and therefore only a partial step," Hermesh said. "At the same time he should be ready to withdraw the Ministry's intention to reduce the income tax for [citizens receiving] higher salaries and to reduce corporate tax, they are now among the lowest in the Western world."

The Finance Ministry also noted that the decision on VAT was made in full coordination with Prime Minister Binyamin Netanyahu's office.